Oil and gas in the capitals
The recent attacks on two tankers (Table 1) carrying naphtha and methanol in the Gulf of Oman were well-planned by a powerful group that has access to intelligence, information, military hardware, and experts. A group that wants to derail any possible negotiations between Iran and the U.S., direct or indirect. It succeeded, for now.
President Trump visited Japan at the end of last May. He asked Japanese Prime Minister Shinzo Abe to visit Tehran, to mediate between the Trump administration and the Iranian regime, on the hope of having a direct dialogue between the two countries.
While Abe was in Tehran, the attacks on the two tankers took place, one carrying naphtha to Japan, and the other one, carrying methanol, is owned by a Japanese company. The timing and the targets cannot be a coincidence.
Someone wants to derail Abe’s effort. Someone who wants to make sure that negotiations between the U.S. and Iran will not happen. While there is a list of possible suspects, it is clear that IRG (Iranian Revolutionary Guard) tops the list. They will do whatever is necessary to derail such negotiations. The Iranian government is under massive political and economic pressure to negotiate, but the IRG and their supreme leader are not.
While Japan is the common element in the attacks mentioned above, the common element in the previous attacks on two tankers in Fujairah in the UAE, and the pumping stations of the East-West pipeline in the middle of the desert in Saudi Arabia, is that all of them circumvent the Strait of Hormuz. The most powerful card Iran has in its war chest is the significance of the Strait to the world, where about 19 MMbopd pass through. Pipelines in the UAE and Saudi Arabia that circumvent the Strait reduce Iran’s bargaining power.
Main impact. Saudi Arabia, and to some extent the UAE, established themselves as reliable and dependable suppliers of energy. Any attacks or disruptions, caused by anyone in the region, harm this strategic objective. Long-term losses from being viewed as unreliable suppliers are massive, as politicians and policymakers in oil-consuming countries reduce dependence on oil imports from the region and, in some cases, reduce dependence on oil altogether. This might explain why countries in the region would like to maintain pressure on Iran, but without escalation.
Trump is wrong on the declining significance of the Strait of Hormuz. Speaking about the Strait of Hormuz and the Persian Gulf, President Trump asserted recently that “We don’t even need to be there, in that the U.S. has just become the largest producer of energy anywhere in the world.” He also questioned the role of the U.S. in the region: The U.S., he said, is “protecting the shipping lanes for other countries” for “zero compensation.”
Here is why he is wrong:
- Throughout history, superpowers have always tried to control trade routes and secure them. Protecting waterways is well-entrenched in U.S. foreign and defense policies.
- U.S. control of the flow of Middle Eastern oil means its control of Europe, Japan and China. Russia will be more than happy to take over such a position.
- Being the largest oil producer in the world does not shield the U.S. from a price shock resulting from instability in the Middle East in general, and from the vacuum caused by the absence of the U.S. from the region.
- The U.S. needs Middle Eastern oil because of crude quality issues: All the increase in U.S. shale production is light crude, super-light, and condensates, while several U.S. refineries need the heavier, more sour crudes. From a policymaking point of view, crude quality matters, probably more than quantity at this stage, especially after the loss of the Venezuelan heavy crude because of U.S. sanctions on that country.
- The cost of protecting the Strait of Hormuz should be compared to the potential losses, if the U.S. were to withdraw from the region, not to the current benefits. That is how U.S. military leaders viewed the role of the U.S. in the Middle East, in recent decades.
- Those countries in the Gulf region can crash the oil market for a long period and reduce U.S. oil production by more than 3 MMbpd, making the U.S. more dependent on the Middle East again.
I will conclude with this statement: Who will be happy to see the U.S. either withdrawing from the Gulf region or reducing its presence? Here is a list: Iran, ISIS, AL Qaeda, Russia and China. I rest my case! WO
